Hyderabad: The MSME, or the micro, small and medium enterprises are vital constituents of the Indian industrial sector. They contribute significantly to the GDP and export earnings besides meeting the social objectives of developing backward areas, reducing regional disparities, and providing employment opportunities to millions of people across the country. Despite this, MSMEs in India suffer from the problems of financial assistance, lack of business expertise, and technological obsolescence. Indian SMEs are also facing tough competition from their global counterparts due to liberalization, redundant manufacturing strategies and uncertain market scenarios.
The MSME sector has consistently contributed around 30 per cent share in India’s GDP generating 111 million job opportunities for skilled and semi-skilled labour. With the addressable credit demand of Rs 37 trillion and existing mainstream supply of Rs 14.5 trillion, MSMEs face a credit gap of Rs 20-25 trillion.
The most common problem that all small-scale businesses have faced, and are still facing is of credit. MSMEs struggle to obtain financial assistance due to several factors like absence of collateral, lengthy paperwork, and lack of trust in loan repayment capabilities. These obstacles remain despite the government’s conscious effort to provide easy credit line to MSMEs.
The backbone of India’s economic structure, the MSME segment, is one of the primary drivers of the country’s industrial sector, accounting for 45 percent of total industrial production, 40% of total exports, and contributing about 30 percent of to the nation's GDP. It’s safe to say that MSMEs have grown to have a strong foothold in both the urban and rural areas of the country. As one of the key drivers of employment, innovation, and economic development—MSMEs have immense potential to ensure an equal distribution of wealth and curb the regional and economic imbalances in the country.
Even with MSMEs playing an instrumental role in India’s economic growth, a large number of them are yet to be integrated into the formal financial ecosystem of the country. Of the 64 million MSMEs in India, only a meagre 14% have access to credit. Data suggest that the overall finance demand by MSME’s is around Rs 69.3 lakh crores with 70 percent of the credit requirement attributed to filling the working capital gap.
There might be a higher failure rate for start-up MSMEs, but despite the risk, the financing of these enterprises is a must for ensuring inclusive growth and here Credit Guarantee Scheme can play a major role. Credit guarantee is not the sole criterion for facilitating MSME credit but we cannot deny the fact that lack of collateral is the major cause of rejection of good projects by Banks. Financial Institutions are also safe while granting loans under Credit Guarantee Scheme. Therefore, this scheme should be popularized among bankers and entrepreneurs. Addressing this issue requires implementing policies that facilitate easier access to credit, such as streamlined loan application processes, collateral-free loans , and financial literacy programs. Policies to strengthen cash flow-based lending, incentivising corporate buyers to support their MSME partners, and integrating TReDS portals with the GST e-invoice portal are some of the potential solutions to mitigate the problem of access to credit in the MSME ecosystem.
Increasing marketability of products is a difficult task not just for MSMEs, but for large-scale businesses as well. Inconsistence and sporadic marketing efforts yield no results. When it comes to small-scale businesses, the lack of resources – time, money, and skilled employees make it impossible to increase visibility and generate quality leads. To help MSMEs overcome this, the NSIC (National Small Industries Corporation (NSIC) under the Ministry of MSME organizes frequent workshops to train enterprises in online and offline marketing of their products and services.
Encouraging FDI’s is vital for MSME sector, as it will help in boosting productivity, competitiveness, job creation and tax revenues. Indian automotive sector has witnessed a 5 percent rise in FDI resulting in global competitiveness with advanced technology for Indian auto-makers. Embracing liberalised FDI aligns with global trends , sustaining India’s appeal for multinational enterprises and fostering rapid economic growth.
Majority of the MSMEs in India operate on stale and obsolete technology which obstructs them from keeping up with the new age world. This is despite the fact, that India is said to have the third largest pool of technologically trained manpower. Adoption of new technology and training employees with these technological upgradations is not only difficult, but also costly – especially for manufacturing businesses where the scope is not just in terms of software, but also in terms of production units. While lack of access to IT education is partly responsible for the technological gap, the biggest factor is lack of awareness which reduces willingness to investment in advanced tech solutions.
Skilled employees are essential for growth of businesses. Multi-national companies (MNCs) understand this and keep on-the-job training at the centre of their functioning. Unfortunately, small-scale enterprises fail in upskilling their manpower, unknowingly taking a hit.
While entrepreneurs may have subject matter expertise relevant to their goods and services, they might lack the business acumen needed to run an enterprise smoothly. These include funding & financing, tracking sales, managing input & output costs, etc.
The prices of raw materials have increased manifold, especially since the beginning of the Covid-19 pandemic. For MSMEs in the manufacturing sector, the procurement of raw material is extremely important to continue operations. However, lack of bulk orders, credit facilities and transportation of raw material make the procurement tedious. To eliminate these limitations, the NSIC runs a ‘Raw Material Assistance Scheme’ which helps small businesses by financing the purchase of raw material – both indigenous and imported.
MSMEs struggle to hire skilled and competent manpower. Lack of name recognition of the company reduces the talent pool from which MSMEs can hire employees as there are fewer responses to job postings by small-scale businesses. Even after finding the right candidate from this small pool, MSMEs lose the right candidate due to inability to offer competitive salary, job security and career development opportunities similar to larger organizations.
The rate of changes is accelerating rapidly. The role of creativity and innovation has increased in this change process for survival. Businesses are becoming knowledge-based and their success & survival is directly related to their creativity, innovation, discovery and inventiveness. MSMEs will have to learn and imbibe the process of innovation in their day to day working to remain competitive.
Indian MSMEs are finding it difficult to sell their products in the domestic and international markets because of increasing competition. Small-scale enterprises face a tough competition from their global counterparts due to liberalisation, as well as from domestic giants due to their immense scale of operation. While the government does run protective schemes for such small-scale enterprises, the competition remains one-sided by and large.
Inadequate management skills hamper business expansion and often cause non-competitiveness of small enterprises. A successful business must be able to grow workforce, cater to diverse customer needs, manage inventory, deal with new competitors, keep the supply chain running and sustain the company’s culture. More often than not, entrepreneurs undermine the importance of effective management and face numerous hurdles when the business expands at the later stage.
The problems faced by the small traditional enterprises with poor support system and little exposure, particularly in accessing technology and maintaining competitiveness, have been formidable. The non-availability of institutional finance on affordable and easy terms is seen as the biggest challenge faced by MSMEs. Further adding to the limitations of MSMEs are lack of formalized contractual relations and the reliance on cash payments.
Apart from this, most of the small-scale enterprises do not have access to well researched database – whether it pertains to market intelligence or technology. This information needs to be disseminated proactively, and on a regular basis.
